How To Buy And Sell Stocks On Your Own

Stocks offer investors the greatest potential for growth (capital appreciation) over the long haul. Investors willing to stick with stocks over long periods of time, say 15 years, generally have been rewarded with strong, positive returns.

how to buy and sell stocks on your own

The risks of stock holdings can be offset in part by investing in a number of different stocks. Investing in other kinds of assets that are not stocks, such as bonds, is another way to offset some of the risks of owning stocks.

Direct stock plans. Some companies allow you to buy or sell their stock directly through them without using a broker. This saves on commissions, but you may have to pay other fees to the plan, including if you transfer shares to a broker to sell them. Some companies limit direct stock plans to employees of the company or existing shareholders. Some require minimum amounts for purchases or account levels.

Dividend reinvestment plans. These plans allow you to buy more shares of a stock you already own by reinvesting dividend payments into the company. You must sign an agreement with the company to have this done. Check with the company or your brokerage firm to see if you will be charged for this service.

Stock funds are another way to buy stocks. These are a type of mutual fund that invests primarily in stocks. Depending on its investment objective and policies, a stock fund may concentrate on a particular type of stock, such as blue chips, large-cap value stocks, or mid-cap growth stocks. Stock funds are offered by investment companies and can be purchased directly from them or through a broker or adviser.

1. Dividends. When companies are profitable, they can choose to distribute some of those earnings to shareholders by paying a dividend. You can either take the dividends in cash or reinvest them to purchase more shares in the company. Investors seeking predictable income may turn to stocks that pay dividends. Stocks that pay a higher-than-average dividend are called "income stocks."

2. Capital gains. Stocks are bought and sold constantly throughout each trading day, and their prices change all the time. When the price of a stock increases enough to recoup any trading fees, you can sell your shares at a profit. These profits are known as capital gains. In contrast, if you sell your stock for a lower price than you paid to buy it, you'll incur a capital loss.

In either case, your fate as an investor depends on the fortunes of the company. A company generally needs strong earnings to pay a dividend, and there needs to be investor demand for you to see capital gains.

The performance of an individual stock is also affected by what's happening in the stock market in general, which is in turn affected by the economy as a whole. For example, if interest rates go up, some investors might sell off stock and use that money to buy bonds. If many investors feel the same way, the stock market as a whole is likely to drop in value, which in turn may affect the value of the investments you hold. Other factors influence market performance, such as political uncertainty at home or abroad, energy or weather problems, or soaring corporate profits.

Some companies also issue preferred stock, which usually guarantees a fixed dividend payment similar to the coupon on a bond. This might make preferred stocks attractive to people looking for income. Dividends on preferred stock are paid out before dividends on common stock.

For many companies that have dual share classes, one share class might trade publicly while the other does not. Nontraded shares are generally reserved for company founders or current management. There are often restrictions on selling these shares, and they tend to have what's known as super voting power. This makes it possible for a group of shareholders to own less than half of the total shares of a company but control the outcome of issues put to a shareholder vote, such as a decision to sell the company.

Industry experts often group stocks into categories, sometimes called subclasses. Each subclass has its own characteristics and is subject to specific external pressures that affect the performance of the stocks within that subclass at any given time.

Part of creating and maintaining a strong stock portfolio is evaluating which sectors and industries to invest in at any given time. Having made that decision, you should always evaluate individual companies within a sector or industry you've identified to focus on the ones that seem to be the best investment choices to help you achieve your goals.

Stocks can also be subdivided into defensive and cyclical stocks, depending on the way their profits, and their stock prices, tend to respond to the relative strength or weakness of the economy as a whole.

Defensive stocks are in industries that offer products and services that people need, regardless of how well the overall economy is doing. For example, most people, even in hard times, will continue filling their medical prescriptions, using electricity and buying groceries. The continuing demand for these necessities can keep certain industries strong even during a weak economic cycle.

Growth stocks, as the name implies, are issued by companies that are expanding, sometimes quite quickly, but in other cases over a longer period of time. Typically, these are young companies in fairly new industries that are rapidly expanding.

Value stocks, in contrast, are investments selling at what seem to be low prices given their history and market share. If you buy a value stock, it's because you believe that it's worth more than its current price. Of course, it's also possible that investors are avoiding a company and its stock for good reasons and that the price is a fairer reflection of its value than you think.

And remember, short-term trading comes with other costs. If you sell a stock that you haven't held for a year or more, any profits you make are taxed at the same rate as your regular income, not at your lower tax rate for long-term capital gains.

You can place buy and sell orders for stocks online, through a mobile app, or by speaking with your registered investment professional in-person or over the phone. If you do trade online or through an app, it's important to be wary of trading too much, simply because it's so easy to place the trade. You should consider your decisions carefully, taking into account fees and potential tax consequences, as well as the impact on the balance of assets in your portfolio, before you place an order.

When you buy stocks on margin, you borrow part of the cost of the investment from your brokerage firm in the hopes of increasing your potential returns, which can magnify both your gains and your losses. For this reason, it's important to understand how margin accounts work and the risks associated with buying stocks and other securities on margin. Learn more about margin accounts.

Short selling is a way to profit from a price drop in a company's stock and, like buying on margin, tends to be a short-term trading strategy. It involves more risk than just buying a stock. To sell a stock short, you borrow shares from your brokerage firm and sell them at their current market price. If that price falls, as you expect it to, you buy an equal number of shares at a new, lower price to return to the firm. If the price has dropped enough to offset transaction fees and the interest you paid on the borrowed shares, you may pocket a profit.

This is a risky strategy, however, because you must still re-buy the shares and return them to your firm. If you must re-buy the shares at a price that's the same as or higher than the price at which you sold the borrowed shares, after accounting for transaction costs and interest, you'll lose money. And generally, the longer you wait to purchase shares, the more you will be paying in interest to your brokerage firm.

Because short selling is, in essence, the sale of stocks you don't own, there are strict margin requirements associated with this strategy, and you must set up a margin account to conduct these transactions. The margin money is used as collateral for the short sale, helping to ensure that the borrowed shares will be returned to the lender down the road.

Often discussed in connection with short selling, "short interest" is a snapshot of the total open short positions existing on the books and records of brokerage firms for all equity securities on a given date. Learn more about short interest here.

Microcap securities, sometimes referred to as penny stocks, include low-priced securities issued by small companies with low market capitalization. These securities are primarily traded on the over-the-counter (OTC) market. While microcap companies can be real businesses developing or offering products or services, the microcap sector has a long history of bad actors engaging in price manipulation and other fraud. However, even in the absence of fraud, microcap stocks can present higher risks than the stock of larger companies. This is largely because relatively little information is available about microcap companies compared with larger companies that list their securities on national exchanges.

This publication explains these choices in greater detail, by laying out the advantages and disadvantages of each and by answering frequently asked questions. Depending on the type of security and where you purchase it, you may or may not have all these choices about how your securities are held. For example, not all companies offer direct registration, and some no longer issue physical certificates. You should ask your broker or the company what options you have.

You may have your security registered in street name and held in your account at your broker-dealer. Many brokerage firms will automatically put your securities into street name unless you give them specific instructions to the contrary. Under street name registration, your firm will keep records showing you as the real or "beneficial" owner, but you will not be listed directly on the issuer's books. Instead, your brokerage firm (or some other nominee) will appear as the owner on the issuer's books. 041b061a72